On My Radar - Understanding Private Credit
March 7, 2025
By Steve Blumenthal
"Anyone who tells you they know what is going on, don’t believe them, no one knows.”
— John Tousley, Managing Director, Global Head of Market Strategy, Goldman Sachs
I’m writing you today from beautiful Park City, Utah. I’m here attending the annual WallachBeth Winter Symposium. Fourteen inches of snow has fallen in the last 24 hours. A skiers dream.
The main focus is on Exchange Traded Funds (ETFs). Morning sessions, afternoon skiing, evening dinners and perhaps most importantly, meaningful connections. I learned a lot.
This is year 14 of the conference. Over that period the ETF industry has experienced rapid growth, driven by low costs, diversification, and accessibility. In the last ten years alone, assets under management has grown form $2.9 trillion to $13.8 trillion (12-31-24). (Source: Morningstar)
The key reason is ETFs are generally more tax-efficient than mutual funds due to their structure and how they’re traded.
ETFs use a mechanism where large institutional investors (called authorized participants) can create or redeem ETF shares by exchanging baskets of the underlying securities rather than cash. This "in-kind" process means the ETF doesn’t have to sell assets to meet redemptions, avoiding taxable capital gains.
Mutual funds typically use cash for redemptions, forcing the fund to sell holdings and realize gains, which are then passed on to shareholders as taxable distributions.
ETFs can be traded throughout the day. Mutual funds trade end of day.
ETFs have evolved from simple index trackers to innovative vehicles catering to broad and niche interests. The industry is thriving.
Key trends:
Actively managed ETFs are gaining traction, blending traditional fund management within a more tax efficent ETF wrapper.
Crypto: Post-2024 regulatory approvals, crypto ETFs are expanding, attracting both retail and institutional investors.
Niche Opportunities: Thematic and hyper-specialized ETFs (e.g., AI, space exploration, inverse equity, covered call strategies, inverse fixed, equity long-short, income for hedging). are multiplying, though some struggle with liquidity and high fees.
Fee competition is driving expense ratios lower benefiting investors.
The major players were present: NASDAQ, NYSE, State Street, JP Morgan, Goldman Sachs, Invesco, BNY Mellon, FirstTrust, VanEck, CBOE, BNY and some niche firms like Grayscale, KraneShares, Pacer, WEBs and BondBloxx. Other attendees included fund managers, pension funds, family offices and wealth advisors. Our conference host, WallachBeth, is one of the leading trade execution firms.
The consensus from the attendees is that ETFs are only in the 2nd or 3rd inning. $13.8 trillion says otherwise, but who knows. What is clear to see is innovation continues.
I learned this week that one of the major ETF issuers, State Street, has introduced a private credit ETF. Private credit strategies are generally available only to accredited investors in hedge fund structures.
How about this? There are tax strategies that can be implimented enabling investor to deliver a highly concentrated stock position into a broadly diversified ETF without causing a long-term capital gain. Many investors may have too high a concentration in a single company. This is groundbreaking stuff.
On the heels of this week’s State Street/Apollo private credit ETF, I thought I’d touch on a paper I wrote several years ago titled Understanding Private Credit. Not all private credit is the same. The paper provides a summary of various types of private credit investments.
As I’ve been writing about for some time, the most important message I can express is that the world is in a structurally different place than it has been in the last 40 years. The good news is you and I have more tools to manage and grow our wealth.
Grab your coffee and settle into your favorite chair. The snow has been outstanding. I promised a summary of the JPMorgan and Goldman Sachs macro presentations (they were excellent) but I need a little more time to organize my thoughts.
Today’s intro quote is from Goldman Sachs John Tousley. He suggested investors should look for "tells" or signals from companies, policymakers, and other market participants that could indicate their underlying strength or weakness, similar to how poker players try to read their opponents' tells. “View everything like your in a poker game,” Goldman’s John Trusley said. I’ll share my bullet point notes with you next week. It’s really good.
On My Radar:
Trade Signals: Update - March 4, 2025
Personal Note: Powder Snow and Chicago
See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.
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Understanding Private Credit
This paper was first written in October 2023 and updated March 2025. Following is a short summary. You’ll find a link at the bottom of the section if you would like to download the full paper.
Why Private Credit?
An attractive feature of private credit instruments is that loans are linked to floating rates, such as SOFR (Secured Overnight Financing Rate). Private credit loans are typically made at SOFR which was 4.33% (March 5, 2025), plus an additional yield of 4% to 10%. For example, currently borrowers pay, and the private credit funds who lend to them earn between 9% to 14%. If SOFR rises, the lending rate increases and, if SOFR falls, the lending rate falls. (Source: New York Fed)
This feature makes the floating-rate debt less susceptible to interest rate changes and an attractive investment alternative for investors.
Traditional fixed income bonds, bond funds and bond ETFs investments offer investors unattractive yields vs. inflation and investors risk loss of capital in rising inflation rising and interest rate cycles.
Why Now?
As I’ve been writing about for some time, the most important message I can express is that the world is in a structurally different place than it has been in the last 40 years. The significant issue is the size of government debt, government deficits and entitlement promise. We sit at the end of a long-term debt accumulation cycle and some form of debt restructuring lies ahead.
“The debt problem is like a medical condition, using a circulatory system metaphor. Just as plaque builds up in arteries, debt accumulates and ‘constricts the circulatory system’ of the economy. The longer you wait to address it, the more dramatic the intervention must be.”
– Notes from David Friedberg, All In Podcast Discussion with Ray Dalio, January 28, 2025
The current set of conditions is not new to humanity, but it is new to most of us alive today. Few have experienced them in our lifetimes. These are common challenges that present at the end of long-term debt accumulation cycles. Historically, cycles last 75 - 100 years. The last one in the U.S. peaked in the 1930s. Governments saw money creation as the best solution and the economic consequence of their fiscal misbehaviors were periods of high inflation and low growth. How it gets resolved this time around remains unknown, but evidence suggests countries debase their currencies by printing new money.
“We’re also at a unique moment geopolitically, and I could see in the next few years that we are going to have to have some kind of a grand global economic reordering, something on the equivalent of a new Bretton Woods or if you want to go back like something back to the Steel Agreements or the Treaty of Versailles, there’s a very good chance that we are going to have to have that over the next four years and I’d like to be a part of it.”
– Scott Bessent, 6/6/24, via Manhattan Institute.” (H/T Luke Gromen)
A Grand Global Economic Reordering: History shows that, in most instances, governments have chosen to inflate their way out of the debt mess. This happens by printing new money. When governments create too much new money, challenges mount. "Too much money chasing too few goods" causes inflation.
The salient point we are making is that the probabilities of an inflationary outcome are too high to ignore. It is probable that the U.S. and much of the developed world will choose to print new money and/or default on a portion of their outstanding debt as part of a grand reordering.
Not surprisingly, this has happened in the U.S. and much of the developed world since 2008 and more significantly since 2020. In the last few years, nearly half of all the dollars every created in the history of the United States were created. It took more than 246 years to print $10 trillion and since 2020 another $10 trillion was created. The inflation challenges we’ve been experiencing should not come as a surprise.
The end of a long-term debt cyclic is a slow-moving event. When we first wrote this paper in 2023, our expectation was for a reset sometime in the second half of this decade. Two years later, our view remains the same. Behind us is inflation wave number one. To politician’s money printing is the easiest path. Waive number two remains a high probability. The trap we are in is a debt trap.
The restructuring occurs when we reach the point where, like in the Road Runner Cartoon, Wylie Coyote finds himself out over the cliff edge. The inflation pain is too great, and it becomes clear to everyone that what we've been doing did not work. Inflation is the match that lights the debt reset-restructure-reordering fuse.
The risk is too high to ignore. This is our working hypothesis. We hope we are wrong.
The winds have shifted, and the benefit of nearly 40 years of declining interest rates is gone. Because of the accumulation of massive debt and entitlement obligations, probabilities favor a prolonged period of higher inflation, higher interest rates and slower growth.
We believe investors can be positioned to prosper if we are correct in our view or not. We believe investors should avoid long-duration fixed maturity bonds that will lose value should interest rates rise. We favor first lien senior secured floating interest rate private credit strategies where yields go up in inflation and higher rate environments. We see yields in the high single digit to mid double digits. If we are incorrect on inflation and rates move lower, our yields go lower which is something that would not disappoint us.
It is hard to see how a 4.25% 10-year U.S. Treasury Yield provides value; especially, if inflation and interest rates rise meaningfully. If you must be in fixed income, we favor durations of two years or less.
The Advantages of Short-term Private Credit Funds
Short-term private credit funds offer a compelling investment opportunity with several advantages for investors seeking income generation, collateral protection, risk mitigation, and portfolio diversification.
Firstly , short-term private credit funds typically focus on lending to small and medium-sized enterprises (SMEs) and other non-traditional borrowers. This presents an opportunity to earn higher yields compared to traditional fixed-income investments like government or corporate bonds. The shorter duration of these loans means lenders can access their capital relatively quickly, providing liquidity advantages.
Secondly, short-term private credit funds are less susceptible to interest rate fluctuations. Loans are short-term with a floating interest rate structure, which mitigates the impact of rising interest rates on portfolio values, reducing interest rate and inflation risks for investors.
Thirdly, these funds often correlate less with traditional asset classes like stocks and bonds. By adding short-term private credit funds to a diversified portfolio, investors can enhance risk-adjusted returns and reduce overall portfolio volatility. Furthermore, investing in short-term private credit funds may offer an element of downside protection. These funds typically prioritize senior secured loans or collateralized debt, which can provide a degree of protection in case of borrower defaults.
Lastly, the private nature of these funds means they tend to be less susceptible to market sentiment. Active management allows fund managers to respond swiftly to changing economic conditions and credit risk, potentially enhancing returns.
Diversification is a crucial consideration in the realm of private credit. Various private credit strategies exhibit differing levels of exposure to the overall well-being of the economy, which impacts the well-being of corporate borrowers, consumers, and real assets. For instance, corporate and real assets often track closely with the ups and downs of the economic cycle. In contrast, strategies like distressed and opportunistic credit may display more counter-cyclical tendencies, meaning they tend to identify more appealing opportunities during economic downturns. Some specialized credit strategies also show reduced sensitivity to the broader economic cycles.
Above is text taken from the Understanding Private Credit paper. I wanted to provide a conceptual understanding as to why this asset class is important. The balance of the paper covers:
How to Analyze Private Credit
The Current Market Backdrop Positive for Floating Rate Debt
The Private Credit Eco-System
Types of Private Credit Funds -The Universe of Private Credit Strategies
Risk Drivers and Due Diligence Considerations
Short-Term Private Credit vs. Traditional Fixed Income
Yield potential
Duration and interest rate risk
Credit risk
Liquidity and diversification
I hope you find the paper helpful.
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CMG is a multi-family office working with high net worth investors. We have extensive experience in the alternative investment space and are thrilled to see some of these strategies coming to the ETF space extending reach to all investors.
Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only.
Trade Signals: Update – March 4, 2025
Channel your inner Charlie Munger… “Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
Let’s look at some potential targets for yields and the S&P 500. A mid 3% yield range for the 10-year Treasury remains my recession zone target. Median Fair Value on the S&P 500 Index is around 4,000. Recession is probable in my view. It’s hard to be patient. There is a reason why Warren Buffet’s Berkshire Hathaway has accumulated so much cash—patience, then extreme decisiveness. You’ll know it when everyone around you is panicking.
Tariff War
U.S. equity markets are down as tariffs and trade tensions remain in focus.
China announced a 15% retaliatory tariff on U.S. agricultural goods and named U.S. defense companies that will face export restrictions. Canada unveiled retaliatory tariffs. Bitcoin and the broader crypto market are sliding again. European equities are under heavy pressure, extending yesterday’s U.S. losses. U.S. Treasuries are slightly stronger, gold is well bid at $2,920/oz, and crude is weakening further, now trading at $67.50/barrel. Source: Bloomberg.
10-year Treasury Yield
The following chart looks at the yield on the 10-year Treasury Note. The first is a long-term monthly chart dating back to 1980. The lower section is the monthly MACD indicator. The green arrow farthest right is the latest trend signal - signaling a downward yield trend—the second looks at the Weekly MACD. Both are signaling a down trend in yields.
The current yield is 4.11%. (note this was as of March 4, 2025. Rates have since spiked higher with bank challenges in Europe and inflationary pressures in Japan).
Source: StockCharts.com
S&P 500 Index
The first technical support line is at 4,800 (red line in following chart). That seems probable.
The “Bear Market Target Zone” shows Median PE around 4,000. Recession likely takes us there.
Source: StockCharts.com
If you’d like a sample of this week’s Trade Signals, please email Amy@cmgwealth.com.
Trade Signals is designed for traders and investors seeking a better understanding of technical trends in various markets. Click on the link below to subscribe or login. The letter is free for CMG clients; reply to this email or contact your CMG rep.
TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.
Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change. Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only.
Personal Note: Powder Snow & Chicago
There is a famous saying all skiers know that says, “there are no friends on a powder day.” Powder rules the day.
One of the challenges with deep powder skiing is falling. Sometimes, a ski is lost under the snow and sometimes the ski is lost. This creates all sorts of problems. Of course, true friends join in the search but inside they itch to dance on the snow. With many skiers on the mountain, in a few hours or so the mountain is tracked out and while still fun, it just isn’t the same a floating up and down on untracked fresh powder.
WallachBeth 2025 Winter Symposium - Park City, Utah
I woke this morning at 4:45 AM mountain time to finish this weeks letter. The goal is to get to Deer Valley Ski Resort (about 15 minutes from my hotel) to catch as much fresh snow as I can. My flight home departs in the early evening. It’s been a long fun week and I’m looking forward to getting home.
I’m traveling to Chicago next week and hosting a dinner for clients and OMR readers on Thursday March 13, at 6pm. We’ll be talking the economics and markets in an intimate small group setting. If you are interested in joining me, seating is limited. If you’d like to attend, please email Amy@cmgwealth.com.
I hope this note finds you doing something really fun.
With kind regards,
Steve
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Stephen B. Blumenthal
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CMG Capital Management Group, Inc.
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management. Author of Forbes Book: On My Radar, Navigating Stock Market Cycles.
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